When Providing Consulting Services Ruins 501(c)(3) Exemption

It is common for a new nonprofit to draw on the experience of its founders. Is there any reason that a nonprofit can not provide consulting services? If the new nonprofit seeks to obtain tax-exempt status under 501(c)(3) there are a number of pot-holes to avoid, based on a recent ruling by the Sixth Circuit in Asmark Institute, Inc.

● The fact that the new nonprofit is a successor to a for-profit “weighs heavily against exemption”

● The sale of services, including consulting services, is commonly considered to be a non-exempt, commercial purpose. B.S.W. Group, Inc., 70 T.C. at 358

● Listing anticipated income solely from fee-based operations and no revenue from grants, donations and fundraising operations indicates an expectation that commercial profits will be the main source of income sustaining the ongoing operations

● Improvements to real estate that are not owned by the non-profit but which instead ultimately benefit a for-profit entity can count as private inurement. See Tex. Trade Schl. v. Comm’r, 30 T.C. 642, 646-47 (1958)

The United States Court of Appeal for the Sixth Circuit upheld the denial of federal income tax exemption for an organization that described its purpose as a resource center for compliance materials for the agribusiness industry. See the following link for the decision.